I didn’t choose that title for my latest article at The American Conservative–it’s a bit too provocative for my tastes–but I don’t think it’s out of line. I don’t see why our Keynesian friends here (and even in the comments of my article) bristle so much at linking the two. Look at this earlier piece criticizing Bastiat from Matt Yglesias (HT2 Bob Roddis). Yglesias writes:
[YGLESIAS WRITING:] Similarly, Bastiat’s alleged broken windows fallacy involves simply assuming that there’s no such thing as genuinely idle resources or an “output gap.” In that context, yes, it’s a vibrant intuitive depiction of crowding out. But this doesn’t counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do.
So would it make everyone feel better if, from now on, I said, “Only Keynesians and monetarists think that natural disasters can be good for the economy?”
(As an aside, I had forgotten just how much I disliked that Yglesias piece. He misspells Bastiat’s first name–and Caplan’s too, but not a big deal–and actually thinks “The Petition of the Candlemakers” is a satire about rent-seeking [!], that may or may not be useful in our current understanding of rent seeking.)
Anyway, back to my article today at The American Conservative. Here’s the news you can use:
[MURPHY WRITING:] Now a sophisticated Keynesian economist might respond to my above arguments along the following lines: “Yes, generally speaking a natural disaster confers no economic benefit whatsoever. However, in the case of idle resources and high unemployment—such as we currently face—the artificial jolt to demand really does raise GDP, rather than simply changing the composition of what is produced. The extra people put to work repairing storm damage don’t simply come from other lines of production, because there was a giant pool of unemployed people on the eve of the storm.”
Even on its own terms, this proposition is debatable. The people unemployed across the country on the eve of the hurricane’s landfall were not perfectly equipped to repair damage on the Eastern seaboard. In other words, much of the labor, glass, wood, steel, rubber, and other resources used in the wake of Sandy will indeed come at the expense of other employments….
However, let us concede for the sake of argument that there is, say, $10 billion in total reconstruction spending, and that this money sucks only unemployed workers back into production; no other output suffers. Just for a specific example, suppose that the $10 billion ends up going to 1 million previously unemployed workers, who each earn $10,000 over a few months repairing the damage. Official GDP goes up, because (by assumption) the output on other items follows the same path it otherwise would have, and now in addition we have the “finished goods and services” of the new window panes, shingles, telephone lines, etc. being produced over the next few months. Can we say in this case that the storm “helped the economy”?
We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare. For in this hypothetical case, the boost to GDP would go hand-in-hand with a demonstrable reduction in aggregate economic well-being. In particular, the people spending the $10 billion would be out $10 billion. By construction in this example, their consumption and accumulation of other durable goods is the same, but they are also spending an extra $10 billion just to repair storm damage. So their savings is necessarily lower by $10 billion, and they have nothing to show for it.
In contrast, the previously unemployed workers are up by $10 billion. Yet it’s not a simple transfer or redistribution—these people had to work for a few months to earn that money, so they didn’t actually gain a full $10 billion, as if they had just been handed the money for free. Thus, to the extent that we want to engage in aggregate measures of human well-being, the only sensible conclusion is that “society” or “America” or “the economy” is poorer on net. To repeat, this is because one group of Americans (those suffering storm damage) are down $10 billion and have nothing new to show for it, while another group of Americans (the 1 million previously unemployed who now get hired to fix the damage) are up, but not the full $10 billion, because of the value of their forfeited leisure.
The “macro” case of an economy with idle resources, suddenly being jolted out of its rut by a hurricane, is analogous to a “micro” case of a man who was laid off, agonizing over what to do with himself. Should he go back to school, apply to work at fast food restaurants, start his own lawn-cutting business…? Then, in the midst of his indecision, he realizes his house is on fire! The man suddenly knows exactly what he needs to do with himself—he has to run to the kitchen and grab the fire extinguisher. Yet would anybody dare argue that the fire, notwithstanding the property damage to the house, at least solved the man’s problem of idle labor?
Incidentally, I may have gotten that “micro” analogy from Silas Barta; we were both thinking along the same lines, last time this issue arose, and it’s possible he crystallized it before I did.
Finally, Daniel Kuehn emailed that Morici guy, and Morici said that he doesn’t think a hurricane can make us wealthier. I know it sounds like I’m being stubborn, but if you care, look at my comment to Daniel on Morici’s response. It makes no sense to me; we must be using “wealth” in different ways, or he is using the relevant baseline to be, “What would society’s wealth be in the month after the hurricane, if instead of the storm we had had optimal fiscal and monetary policy?” But on a commonsense meaning of what it would mean for the storm to make us wealthier (not counting human tragedy), I don’t see how Morici gets around the conclusion that his position implies it. I’m being serious, if someone can explain to me what Morici means, I will be grateful; I genuinely don’t understand the sentences he sent to Daniel over email.